Despite the sputtering local construction economy and the recent contractor failures that have made headlines, surety companies have remained disciplined in their underwriting decisions over the past few years. Declining premium volumes have not led to relaxed underwriting standards, which is good news for the well-run, well-capitalized construction firms.
Perhaps it may just be a quarterly aberration, but the recently released September 30, 2014 Premium/Loss figures from The Surety & Fidelity Association of America might throw some caution on this continued optimism, based on the profitability of the surety industry. According to the figures, the 2014 3Q loss ratio was 47.6%. A loss ratio of this level will generally result in a bottom line loss for a surety company. Granted, it is only one quarter, but since we have not seen negative quarterly results recently, it bears watching.
While commenting on the surety underwriting results, it is truly amazing that the surety industry has remained profitable during the “Great Recession” economic downturn of 2008 to present. Although the surety premiums have not recovered to pre – 2008 levels, the underwriting results have been outstanding. One factor in the underwriting equation may be that the surety industry, just like insurance, thrives on bad news. With the economy in distress, we have anticipated a landscape of subcontractor failures, unpaid suppliers and defaulting general contractors. In reality it just did not happen. However, we probably made enough private owners, lenders and general contractors nervous that they increased their use of bonds which helped to offset the reduced premiums sureties received from the public sector.
From a contractor perspective, all is fine. The surety industry is not over-reacting to this uptick in claims. In addition, with the influx of new entrants into the surety industry, the major established markets are being responsive to protect their customer base.
Information about the Author: Bill Cowan has 38 years of surety bonding experience. He successfully advanced in the surety company industry attaining the position of Vice President with St. Paul / Travelers in Baltimore, MD. In 2004, Bill joined Marsh & McLennan Agency, known locally as Insurance Associates Company in Rockville, MD as the Vice President of Surety. At Marsh & McLennan Agency, known locally as Insurance Associates Company he oversees a large and diverse portfolio of contract and commercial surety accounts in the Greater Washington DC market. He is also managing our Towson, MD surety office.